Gold, silver, pgms, mining and geopolitical comment and news

ECB

The investment case for gold and other precious metals got a boost last week in light of news that might concern some equity investors. The European Central Bank (ECB) announced that it would be drawing quantitative easing (QE) measures to a close by halting its 2.6 trillion-euro bond-purchasing program, begun four years ago as a means to provide liquidity to the eurozone economy after the financial crisis. Interest rates, however, will be kept at historically low levels for the time being.

The ECB, then, will become the next big central bank, after the Federal Reserve, to end QE and normalize monetary policy. Although it’s steadily been tapering its own purchases of bonds, the Bank of Japan (BOJ) is still committed to providing liquidity at this point. Assets in the Japanese bank now stand north of 553.6 trillion yen ($4.86 trillion)—which, amazingly, is more than 100 percent of the country’s entire gross domestic product (GDP). Holdings, in fact, are larger than the combined economies of India, Turkey, Argentina, Indonesia and South Africa.

In the past, I’ve discussed the economic and financial risks when central banks begin to unwind their balance sheets. The Fed has reduced its assets six times separate occassions before now, and all but one of those times ended in recession, according to research firm MKM Partners.

“Business cycles don’t just end accidentally,” MKM Chief Economist Mike Darda said in 2017. “They are killed by the Fed.”

We can now add the ECB and, at some point, the BOJ to this list. The three top central banks control approximately $14 trillion in assets, a mind-boggling sum, and it’s unclear at this point what the ramifications might be once these assets are allowed to roll over.

The Widest November Budget Deficit on Record

In addition, the Treasury Department revealed last week that the U.S. posted its widest budget deficit in the nation’s history for the month of November, as spending was double the amount of revenue the government brought in. The budget shortfall, then, came in at a record $205 billion, almost 50 percent over the spending gap from a year ago.

This follows news that U.S. government debt is on pace to expand this year at its fastest pace since 2012. Total public debt has jumped by $1.36 trillion, or 6.6 percent, since the start of 2018, making it the biggest expansion in percentage terms since the last year of President Barack Obama’s first term, Bloomberg reports.

As of last Monday, the national debt stood at just under $22 trillion, and by as soon as 2022, it could top $25 trillion, according to estimates.

As I shared with you in November, the government could very well be in a “debt spiral” right now, in the words of Black Swan author Nassim Taleb. This means it must borrow to repay its creditors. And with rates on the rise, servicing all this debt will continue to get more and more expensive.

It’s for this reason, among others, that I recommend a 10 percent weighting in gold, with 5 percent in bullion and gold jewelry, the other 5 percent in high-quality gold stocks, mutual funds and ETFs.

Christmas Comes Early for WHEATON PRECIOUS METALS

Gold mining investors and Canadian capital markets received an early Christmas gift last Friday. Wheaton Precious Metals, one of the largest precious metals streaming companies in the world, announced that it reached a settlement with the Canadian Revenue Agency (CRA), the equivalent of the IRS. Before now, Wheaton had been in an ongoing legal feud with the agency over international transactions between 2005 and 2010.

According to the agreement, income generated through Wheaton’s foreign subsidiaries will not be subject to Canadian taxes. The company, however, will need to mark-up the cost of service provided to foreign subsidiaries, from 20 percent to 30 percent.

“The settlement removes uncertainty with the use of our business model going forward and puts the tax issue behind us so that we can continue to focus on what we do best: building and managing our high-quality portfolio both organically and by accretive acquisitions,” commented Randy Smallwood, Wheaton president and CEO.

“We expect the stock to react positively to the news given the tax dispute was an overhang,” Credit Suisse analysts shared in a note to investors today. Indeed, Wheaton stock was trading up as much as 12.4 percent in New York following the news, hitting a four-month high of $19.63 a share.

I want to congratulate everyone at Wheaton, particularly Randy for his resilience and strong leadership. He’s always offered invaluable insights to our team and investors. I encourage interested registered investment advisors (RIAs) to check out the July 2018 webcast I did with Randy, where we discussed our seven top reasons to invest in gold. You can listen to the replay by clicking here.

Looking more Las Vegas casino than Oval Office, the stage Donald Trump delivered his nomination acceptance speech from Thursday was all gold, from the stairs to the podium, completely befitting of his showman-like style. Whether you support or oppose Trump, it’s time to face reality. This is really happening, and we should all brace ourselves for what will surely be one of America’s messiest, ugliest general election seasons.

Only time will tell which candidate will be triumphant in November, but in the meantime, one of the winners might very well be gold, which has traditionally attracted investors in times of political and economic uncertainty. In the United Kingdom, which voted one month ago to leave the European Union, gold dealers are seeing “unprecedented” demand, especially from first-time buyers. Some investors are reportedly even converting 40 to 50 percent of their net worth into bullion, though that’s not advisable. (I always suggest a 10 percent weighting, diversified in physical gold and gold mining stocks.) In Japan, where government bond yields have fallen below zero and faith in Abenomics is flagging, gold sales are soaring.

It’s not unreasonable to expect the same here in the U.S. between now and November (and beyond).

Strong U.S. Dollar and Treasury Yields Weighing on Gold

More so than the upcoming election, gold prices are being driven by U.S. dollar action, interest rates and low-to-negative bond yields around the world. (Between $11 trillion and $13 trillion worth of global sovereign debt currently carries a negative yield.) Right now the yellow metal is in correction mode on a strengthening dollar and rising two-year and 10-year Treasury yields, both of which share an inverse relationship with gold.

It’s also worth mentioning that the summer months have historically been among the weakest. By contrast, some of the highest gold returns of the year have occurred in September, when the Love Trade heats up in India in anticipation of Diwali and the wedding season.

For the past several trading days, gold demand had also been overshadowed by a hot equities market, with many stocks hitting 52-week highs. Both the S&P 500 Index and Dow Jones Industrial Average closed at all-time highs, twice in the latter’s case. The CNN Fear & Greed Index, which measures investor sentiment, is currently in “Extreme Greed” mode, at more than a two-year high.

With gold taking a breather, now might be a good buying opportunity. Since 1970 there have been only four major gold bull markets, and the consensus among analysts right now is that we’re in the early stages of a new one, with end-of-year forecasts in the $1,400 an ounce range.

Rumors of Brexit’s Negative Impact Have Been Greatly Exaggerated

Despite gold’s correction, the metal got a boost last Thursday courtesy of Mario Draghi. The European Central Bank (ECB) president, as expected, announced that euro area interest rates and asset purchases would remain unchanged as economic ramifications of the Brexit referendum continue to be assessed.

Speaking of Brexit, Draghi noted that markets have met the volatility and uncertainty in the month following the U.K. referendum with “encouraging resilience.” Like many others, he had predicted that Brexit would dramatically stunt euro growth, but as we’ve already seen, such claims are overdone. In a note released last week, securities trading firm KCG wrote that June 24, the day following the British referendum, “was no repeat of August 24,” a reference to the “flash crash” that struck equities last summer and led to ETF mispricing.

Last week, the International Monetary Fund (IMF) trimmed 0.1 percent from its global economic growth forecast for the year, singling out Brexit fallout as the culprit. Curiously, though, the organization sees the U.K. growing faster than both Germany and France this year and next. This disconnect prompted U.K. Independence Party MP Douglas Carswell to label the IMF as “clowns” with “serious credibility problems.”

Following Draghi’s statement, gold prices immediately popped in Thursday morning trading, effectively hitting the pause button on the correction. On Friday, though, prices continued to slide, contributing to gold’s second straight week of losses.

The next hurdle to be cleared is a U.S. interest rate hike. Expectations that rates will go up in September have wobbled back and forth since Brexit, but in recent days, it’s been reported that Federal Reserve officials feel confident enough to raise them at least once before the end of the year. Gold will face additional pressure if rates are allowed to rise, but if the Fed chooses to stand pat, it could serve as another catalyst for a price surge.

Gold Today –Gold closed in New York at $1,319.30 on Wednesday after Tuesday’s close at $1,332.30.

The $: € rose to $1.1029 up from $1.1002.

The dollar index fell to 97.00 from 97.12 Wednesday.

The Yen was slightly weaker at 107.02 from Wednesday’s 106.48 against the dollar.

The Yuan was stronger at 6.6742 from 6.6785 Wednesday.

The Pound Sterling was stronger at $1.3254 down from Wednesday’s$1.3178.

Yuan Gold Fix

Trade Date

Contract

Benchmark Price AM

Benchmark Price PM

2016 07 21

2016 07 20

SHAU

SHAU

282.87

/

282.96

/

Dollar equivalent @ $1: 6.6742

$1: 6.6770

$1,318.25

/

$1,318.67

/

Shanghai prices were in line with those of New York. Demand in China is rising with these lower prices. The media has labeled retail gold buyers as ‘Mammas’, pointing to the conservative older ladies who invest for long term financial security. These investors likely experienced the days of hyperinflation, or at least their own mothers related tales from those days.

We find it extraordinary that the media likes to give demeaning names to those who distrust the global financial system and favor gold itself. We have found such investors just as intelligent and perceptive as traders who go for short term profits. Fortunately few precious metal investors are affected by such puerile name calling.

The gold price in the euro was set at €1,200.08 down €4.00 from Wednesday’s €1,204.00.

Ahead of the opening in New Yorkthe gold price stood at $1,320.65 and in the euro at €1,198.63.

Silver Today –The silver price closed in New York at $19.61 on Wednesday down from $20.00 on Tuesday.Ahead of New York’s opening the price was trading at $19.42.

Price Drivers

With today’s European Central Bank meeting likely to have an effect on exchange rates and the gold price the prospect of more easing becomes important. But as with the Bank of Japan’s failure to move of late [saying ‘helicopter money’ is off the table], so the E.C.B. finds itself in a position where it is extremely limited in what it can do now or in the future. Lending is timid, so stimuli are not bearing fruit!

With the downward impact of Brexit on growth there are few relevant statistics that can be used to guide the E.C.B. Therefore we do not expect any action today [rates remain unchanged]. But we might see signals for more stimuli to be deployed when data is available for the next decision in September.

A major concern is how much further Mario Draghi of the E.C.B. can go [like the B. of J.] with a stimulus package that already includes a €1.7 trillion-euro ($1.9 trillion) asset-buying program increasingly constrained by ultra-low debt yields. A problem for policy makers is that although they’ve gone out of their way to spur credit expansion, the pick-up in lending remains timid. Under its own rules, the central bank can only buy debt with a yield at or above the deposit rate. Will they change rules in the future?

The E.U. is in uncharted territory. It is likely to castigate governmental inactivity on the growth front. This is gold & silver positive!

Gold ETFs – In New York on Wednesday there were no purchases into the SPDR gold ETF (GLD) or the Gold Trust (IAU), leaving their holdings at 965.221 tonnes and at 216.94 tonnes respectively.

Since January 4th this year, the holdings of these two gold ETFs have risen by 384.57 tonnes.

Gold Today –Gold closed in New York at $1,332.30 on Tuesday after Monday’s close at $1,329.30.

The $: € rose to $1.1002 down from $1.1058.

The dollar index rose to 97.12 from 96.77 Tuesday.

The Yen was slightly weaker at 106.48 from Tuesday’s 106.11 against the dollar.

The Yuan was stronger at 6.6785 from 6.6920 Tuesday.

The Pound Sterling was weaker at $1.3178 down from Tuesday’s$1.3167.

Yuan Gold Fix

Shanghai prices were not available on site today.

The People’s Bank of China stepped into the Yuan market today and strengthened the currency as you can see above.

We continue to expect the Yuan to weaken down to 7.00 to the U.S. dollar by year’s end.

Bear in mind that with all the competitive devaluations across the world the dollar’s strength also meant the Yuan’s strength when it was around 6.2 to the dollar. China has not been devaluing against the dollar but is now trying not to be strong with it.

The fall in the Yuan is being engineered cautiously and without attracting too much attention. So far it has succeeded. Perhaps the PB of C is now trying to slow the fall so as to stay in the shadows.

The gold price in the euro was set at €1,204.00 down €0.74 from Tuesday’s €1,204.74.

Ahead of the opening in New Yorkthe gold price stood at $1,323.75 and in the euro at €1,202.21.

Silver Today –The silver price closed in New York at $20.00 on Tuesday down from $20.07 on Monday.Ahead of New York’s opening the price was trading at $19.74.

Price Drivers

With tomorrow’s European Central Bank meeting gold and silver prices are trying to mark time in a poor Technical environment.

Most expect the E.C.B. to do nothing, but the pressure is mounting heavily for more easing.

The euro remains relatively strong and the economic outlook for the E.U. remains tilted to the downside. The potential for a recession is there. So something must be done.

Yes, most are worrying that there is insufficient post-Brexit data to go on, but the need for more easing is very clear. So while most do not believe Draghi will do anything, we expect action!

Such action will precipitate a fall in the euro, the E.U. hopes, but as we have said many times before, the U.S. cannot afford to see a dollar rise through the 100 level on the dollar index.

Gold ETFs – In New York on Tuesday there were no purchases into the SPDR gold ETF, but there were purchases of 0.60 of a tonne into the Gold Trust, leaving their holdings at 965.221 tonnes and at 216.94 tonnes respectively.

Since January 4th this year, the holdings of these two gold ETFs have risen by 384.57 tonnes.

Right out of the gate, I want to thank everyone who took time out of their busy schedules to tune in to our gold webcast last Wednesday. I also want to thank Aram Shishmanian, CEO of the World Gold Council, for joining me as our special guest. His deep insights into gold investing were well articulated and highly appreciated. If you happened to miss it live, I urge you to catch the replay, which we’ll be posting on usfunds.com soon. Look for it!

If you’re a serious investor—and because you’re reading this, I have to assume that you are—gold is looking more and more like a crucial trade. Fewer than two weeks remain before United Kingdom voters decide on whether the country will continue to be a member of the European Union (EU) or become the first-ever to leave it. The “Brexit,” as it’s come to be known, is arguably the most consequential political event of 2016—perhaps even more so than the U.S. presidential election in November—with far-reaching implications.

Should the U.K. leave, it will certainly underline the question many people have about the EU’s viability. And remember, this is a group of countries that collectively has the world’s second largest gross national product (GDP), followed by China.

But whatever happens, “the European Union is not going to remain the same,” as Aram put it during the webcast. “The euro is still very unstable, and I think we could easily see an environment in which trade barriers will increase and currency wars will increase. Regrettably, we could have a weaker global economy.”

With this as the threat, “gold’s role is one of wealth protection,” Aram said.

Taking Precautions Against an Unknowable Future

Even Europeans are beginning to lose confidence in the European experiment. The Pew Research Center recently polled nearly 10,500 Europeans from 10 separate EU countries on their favorability of the 28-member bloc. Nearly half of all respondents—47 percent—held an unfavorable view.

Trust in the European Central Bank (ECB) continues to falter as well. In a blistering note titled “The ECB must change course,” Deutsche Bank called out the central bank for “threatening the European project as a whole for the sake of short-term financial stability.” The ECB’s actions have “allowed politicians to sit on their hands with regard to growth-enhancing reforms.” The longer the bank persists with a negative interest rate policy, the more damage it will inflict upon Europe, Deutsche added.

Meanwhile, Frankfurt-based Commerzbank is considering stashing physical cash in pricey vaults instead of keeping it with the ECB, whose policies are cutting into bank profitability.

Speaking to the World Gold Council’s Gold Investor newsletter this month, former Governor of the Bank of England Mervyn King criticized the ECB’s negative rate policy, saying: “If you repeatedly bring down interest rates to try and persuade people to spend today rather than tomorrow, it works for a while. But they become increasingly resistant to being asked to spend their resources now rather than save for the future.”

Like Aram and others, Governor King sees gold as a likely solution. “There is clearly a need to take some precautions against an unknowable future,” he said, which is the same argument for having health insurance.

Negative rate policies are having a huge effect on bond yields, as you can see below. Over $10 trillion worth of government debt across the globe carried a negative yield as of the end of April. (In a tweet last week, legendary bond guru Bill Gross called it “a supernova that will explode one day.”) In Switzerland, three quarters of all government bonds right now actually charge investors interest. Real harm is being done to retirees, who have had to pick up part-time work at Walmart or become Uber drivers to offset lost interest on their savings and pensions.

This is prompting investors to look elsewhere, including the U.S. municipal bond market, which has attracted $632 billion in assets this year alone as of June 1. Of that amount, more than $22 billion has flowed into muni mutual funds, the best start to a year since 2009. Between that year and the end of 2015, the amount of U.S. municipal debt held by foreign investors climbed 44 percent, validating its appeal as an investment with a history of little to no drama, even during times of economic turmoil and periods of rising and lowering interest rates.

$1,400 Gold this Summer?

Joining Aram in seeing the Brexit as further proof of impeding economic troubles is billionaire investor George Soros. After a hiatus of conducting any personal trading, the 85-year-old is back in the game—this time with some bearish investments. In the first quarter, he purchased a $264 million stake in Barrick Gold, the world’s largest gold producer, and a million shares in precious metals streaming company Silver Wheaton. It appears he’s added to both positions, indicating a bet against the broader equity market.

Now, with a Federal Reserve rate hike looking more and more unlikely this month, gold is expected to resume its bull run, according to Australia and New Zealand Bank Group (ANZ) commodity strategist Daniel Hynes. This, along with a possible Brexit, could push the yellow metal to $1,400, a price we haven’t seen in three years this month.

Paradigm Capital also sees the rally picking up where it left off in May, noting that gold’s trajectory so far this year resembles the one it took in 2002, the first full year of the last bull market, which carried the metal to $1,900 in 2011. “The resemblance is rather striking,” Paradigm writes.

The investment dealer forecasts gold to reach nearly $1,400 by year-end after a dip in October. It also maintains its position that this particular bull run will peak at $1,800 sometime during the next three to four years.

Whether or not this turns out to be the case is beside the point. Savvy investors—not to mention central banks and governments—recognize gold’s historical role in minimizing the impact of inflation, negative rates and currency depreciation. This is what I call the Fear Trade, and I always advocate up to a 10 percent weighting in gold that includes gold stocks as well as bullion, coins and jewelry.

Catching Up with Sectors and Industries

Because we’re near the halfway mark of 2016, I thought you’d be interested to see what the top performing sectors and industries were for the year so far.

As for sectors, utilities is on top, delivering more than 15 percent so far. Jittery investors, worried about slow global growth and geopolitical threats, have moved into defensive stocks such as water and electricity providers and telecommunications companies, many of which offer steady dividends in a low-yield world. Financials, as you might imagine, have been hurt by interest rate uncertainty.

Below I’ve highlighted the 10 best performing industries for the year, and interestingly enough, metals and mining companies, particularly those involved in the gold space, lead all others. Spot gold is up 20 percent so far, but amazingly gold miners have doubled investors’ money. Metals and mining companies have rallied more than 53 percent.

Gold Today –Gold closed in New York at $1,253.90 down from $1,261.40 Wednesday. In Asia this morning, it moved lower to $1,245 and then held there in London until the LBMA price setting was set at $1,247.25 down from $1,258.25. The dollar index is slightly higher at 97.37 down from 97.17 on Tuesday.

The dollar is up against the euro at $1.0972 from $1.0963 on Wednesday. The gold price in the euro was set at €1,136.76 down from €1,143.83.

Ahead of New York’s opening, the gold price was trading at $1,248.00 and in the euro at €1,137.44.

Silver Today–The silver price closed in New York at $15.31 down 5 cents. Ahead of New York’s opening the silver price stood at $15.27.

Price Drivers

E.U. Today at 12.45 European time Draghi of the E.C.B. announced more stimulusmeasures, including a further lowering of interest rates and a boost to the amounts of QE. This has been discounted in the gold price already, with gold’s price threatening the Technical picture now.

But the broad opinion is now that his stimuli will have little impact. We are watching the exchange rate of the euro to the dollar in particular. We have said before that the U.S. does not want to see a strong dollar, particularly against the euro and will not want the dollar index over 100 or the euro lower than $1.05 to $1.07. Gold slipped sharply on the news, but then picked up again even more strongly.

With governments in the E.U. having done too little, we expected Draghi to give them a mild castigation once more, but it is difficult to see if it is either possible or reasonable to expect him to do much more than he has. Hence we do expect to see the E.U. growth coming under pressure alongside the global economy, which is now in recession. Will we see the “derailment” the IMF has warned about? Standing back and gazing at the big picture, we see little reason to expect growth to be lifted no matter what Draghi does. If he disappoints then we may see the ‘derailment’ soon. The scene remains gold positive!

Gold ETFs There were purchases of 2.081 tonnes of gold into the SPDR gold ETF and purchases of 0.45 of a tonne into the Gold Trust yesterday. The holdings of the SPDR gold ETF are now at 792.820 tonnes and at 191.52 in the Gold Trust. While this was a reasonable level of buying into the two gold ETFs in the U.S. fears of what the market will do after Draghi’s announcement caused dealers to pull prices back.

Because, once again, physical sales were not a feature, we expect the gold price to be volatile today. If the euro does not fall strongly, we expect physical gold buyers to rush back in.

What is clear is that today will become a higher risk day than most.

Silver – The silver price remains on the back foot waiting for gold to go higher.

Julian Phillips’ analysis of what’s going on in the gold and silver markets and key market drivers.

New York closed at $1,193.40 up $3.70 on Monday as the trading range remains tight but pushing up persistently. Today sees the dollar weaker at $1.1126 down from $1.0898 against the euro with the dollar index at 96.05. The LBMA Gold Price was set at $1,186.60 down $2.15 and the equivalent euro price was €1,061.83 down €20.92. Once again this was a currency play against a weaker dollar and stronger euro. Ahead of New York’s opening, gold was trading in London at $1,188.60 and in the euro at €1,068.93 with the euro recovering still further.

The silver price rose slightly to $16.80 up 7 cents in New York. Ahead of New York’s opening it was trading at $16.66.

With the dollar weakening traders and speculators need to decide is gold going up against a stronger euro or up with a stronger dollar. Any movements we see in the gold and silver prices are still being moved by currencies. The moves are so small now that we hesitate to attribute too much to them. The price of gold and silver remains in the tight trading range it has for the last couple of weeks and in the fairly narrow trading range it has been in for 18 months. We are close to several global events that will directly impact the gold price and by extension the silver price. After implying the dollar bull run could be over, we now see the dollar falling back quickly as visions of a strong recovery begin to fade after guiding investors for the last 7 years.

With the euro recovering [or is it the dollar weakening] the first of these is expected to be Greece, where a major meeting of the main E.U. leaders took place on Monday. The signs are that this was a conclusive meeting where Greece is going to be given a take it or leave it proposal. Greece in turn has formulated its own plan to give to these leaders. While the Greeks say they can pay the first portion of the IMF debt this week, it is clear that this will drain remaining cash resources. With the Greek financial situation not only bankrupt, we are now at the point where they will have to leave the E.U. and euro if they fail to pay all due tranches of their debt. As the euro will go much stronger if Greece leaves the E.U. it seems the market is discounting a ‘Grexit’. One could say they could have taken action to leave the E.U. and euro years ago and kept the funds in the country that have now gone. But politics has demanded the tragedy and the Drachma. The Drachma has now become palatable to the Greeks.

Yesterday saw sales from the SPDR Gold ETF of 4.176 tonnes and purchases into the Gold Trust of 0.11 of a tonne. The holdings of the SPDR gold ETF are at 709.891 tonnes and at 166.71 tonnes in the Gold Trust. While these were large sales they had no impact on the gold price. As we move into ‘no widows and orphans’ territory we believe these sales were from an investor unhappy with the risks, despite the limited downside ones.

Julian Phillips’ comments on the gold and silver markets today and factors driving the prices.

New York closed at $1,204.50 up $5.50 on Friday in NY. Asia took it up to $1,208 with London holding it there ahead of the LBMA Gold Price. The LBMA Gold price was set at $1,203.25 down $1.30. The euro equivalent stood at €1,118.83 up €7.11 against a weaker $: € rate of $1.0753 against yesterday’s $1.08355. Ahead of New York’s opening, gold was trading lower in London at $1,198.30 and in the euro at €1,115.68.

The silver price closed at $16.26 down 3 cents on Friday. Ahead of New York’s opening it was trading at $16.05.

The dollar began the week at $1.0781 and the dollar index at 97.52 showing a consolidating dollar more than a rising euro. Gold moved through its trading range, ahead of New York’s opening. Once again the gold price was essentially moved sideways ahead of New York’s opening confirming the tightness of the trading range implying a strong move anytime.

The E.C.B.’ Draghi told the media on Friday that it was pointless to short the euro. History shows that when a central banker attempts to stall the movement of a market trend, it is taken as an incentive to do the opposite. We don’t see why this time an exception should be made. As we said last week, “The factors that drove the dollar higher remain in position and the trend remains for a stronger dollar.” After all, the E.U. is gaining competitiveness enormously by the fall in its exchange rate.

To us the Greek situation is becoming more transparent as Greece said it won’t renege on election pledges to end austerity measures. The Deputy Prime Minister said, “We don’t budge from our red lines.” Now look at the laid back attitude of the Prime and Finance Ministers of Greece and we see them waiting for the E.U. to give a solution as they are unlikely to do more. Unless the E.U. offers more money Greece will be ejected from the euro. The tragedy will therefore grind on until June with the euro tending to weaken until then [we remind readers that the euro trend is down while E.U.Q.E. continues through to Sept 2016].

There were purchases of 2.988 tonnes into the SPDR gold E.T.F. but no change in the Gold Trust on Friday. The holdings of the SPDR gold ETF are at 739.069 tonnes and at 165.28 tonnes in the Gold Trust.

From today onwards we expect Indian demand to subside as the festival season comes to an end.

Julian Phillips’ daily roundup of what is happening in the gold and silver markets and the market forces driving them

The gold price remains under the influence of arbitrageurs working the gold price, the euro and the dollar exchange rates even after the announcement, with details of the E.C.B.’ quantitative easing policies. The immediate impact of this statement and following details was to see the euro continue to fall, as Draghi wants. The process of digesting the statements will continue today and fully impact next week. In the meantime, gold is now sitting just below $1,200 but not so far as to break down.

Please note that the dollar index has jumped this week to 96.80 a new high. But gold has just about kept pace with the rise, taking gold up against all other currencies.

Asia too has been lackluster this morning. The government of China announced yesterday that growth [GDP] will only target 7% this year. This number does not tell the full story at all. The government has built the infrastructure for the nation, now it needs to get its people to use it fully and develop a consumer [demand] driven economy that brings with it sustainable growth. This is the hard part. But from a gold investor’s standpoint this is positive news as it is the new wealth and the growing wealth of the current middle classes that will buy gold. Efforts to increase their wealth, as is the target of the government, will benefit gold hugely. Bear in mind a greater Chinese level of demand for gold will take it beyond the capacity of the gold market supplies to satisfy it.

With Modi’s government in India setting similar goals for his middle classes Indian demand for gold will steadily increase too.

ETFs and Markets

There were no sales or purchases from or into the SPDR gold ETF or the Gold Trust yesterday. The holdings of the SPDR gold ETF are at 760.799 tonnes and at 165.46 tonnes in the Gold Trust.

New York closed at $1,198.00 down $1.40 in a thin market still dominated by currency issues. Asia took the gold price up slightly to $1,198.90 before London pulled it down to $1,194. London then Fixed the gold price at $1,196.50 down $3.25 and in the euro, at €1,090.602 up €4.561, while the euro was at $1.0971 down nearly three quarters of a cent again. Ahead of New York’s opening, gold was trading in London at $1,196.40 and in the euro at €1,093.25.

The silver price closed at $16.21 up 3 cents. Ahead of New York’s opening it was trading at $16.05. We feel that the silver price may well drop much faster than gold if the gold price falls further, but as Asian demand comes in we expect the silver price to recover quickly once more.

Julian Phillips’ analysis of what’s happening in the New York and London gold markets and on geopolitical events affecting the precious metals markets.

New York closed yesterday at $1,199.40 down $3.80 in a market dominated by currency issues. Asia took the gold price up to $1,204 before London pulled it down to $1,199. London then Fixed the gold price at $1,199.75 down $4.50 and in the euro, at €1,086.041, up €3.374, while the euro was at $1.1047 down nearly three quarters of a cent. Ahead of New York’s opening, gold was trading in London at $1,200.00 and in the euro at €1,086.17.

The silver price closed at $16.18 down 8 cents. Ahead of New York’s opening it was trading at $16.20. The silver price may well drop much faster than gold if the gold price falls further, but as Asian demand comes in we expect the silver price to recover quickly once more.

There were no sales from the SPDR gold ETF yesterday, but there was a sale of 0.48 of a tonne from the Gold Trust, on Wednesday. The holdings of the SPDR gold ETF are at 760.799 tonnes and at 165.46 tonnes in the Gold Trust. The gold price is being influenced by arbitrageurs working the gold price, the euro and the dollar exchange rates. Such a fall to just below $1,200 will, we expect, bring Asian buyers into the market, as the prices are not being moved on significant physical sales.

Today, we wait to hear the details of the E.C.B.’ quantitative easing program that will last, at least, until September 2016. We expect it will have to last much longer because the vigor and drive in U.S. business is far more than that of the Eurozone, as a whole. In Socialist Europe, where regulations and national interests have produced a snail’s pace of reform, lending has not been encouraged by low interest rates. From the Greek efforts to halt the bailout program to the slow progress on cutting French debt the political masters of the Eurozone are unwilling to take the steps the E.C.B. says are essential for sustainable growth. This leaves the Q.E. program the only real driver of growth in the area. We do see the situation as bringing dangers to the credibility of the euro in the future.

Though the Eurozone is showing initial signs of a recovery, inflation is still unacceptably low and may well remain so for some time to come. While the markets are still discounting the impact of Eurozone Q.E. it is the exchange rate that is discounting it the most. This must delight the E.C.B. as they know that a low euro does promote global business as prices for its goods fall. We wonder just how long the U.S. will tolerate the falling euro.

We cannot emphasize enough the damage that is being done to confidence not just in the euro but in the world of currencies. The concept of currencies measuring value went out of the door long ago. In time, this will benefit the gold price, as it has always done in the past.

Julian Phillips’ detailed geopolitical analysis of the dilemma facing the new Greek government as it weighs up the pros and cons of actually dropping the Euro – and the reason why Germany, the ECB and the more economically stable northern European nations can’t afford to let Greece go. The massive high stakes poker game is only just beginning!

As we watched the Prime Minister and the Finance Minister of Greece travel though Europe in a failed attempt to re-negotiate the terms of the “Bailout” it received, we find ourselves thinking quite differently to the mainstream commentators. Ours is not a jaundiced view but a realistic one. Pragmatism demands we do so. The prime underlying factors that will be brought into play are the interests of each side.

After all, countries don’t have friends they have interests, even with fellow members of the Eurozone. These will dictate the result and likely the tactics on each side. We do not see these as friendly negotiations at all. For Greece the stakes are higher than they are for the E.U.

Not Friends, only interests!

Cutting through the rhetoric and cordiality we have been seeing this week, the interests of each side are very clear.

Greece, while seeing the faults of the past since it joined the Eurozone, feels it has suffered enough punishment with a contraction of its GDP and what is now a perpetual debt crisis. It now believes the bailout has stripped the nation of its dignity.

The 25% contraction of GDP together with 50% of its youth unemployed and its skilled workforce leaving to find employment in other countries, Greece is bankrupt with no ability to repay its debt. It has little to lose. The statistics point to growth appearing again, but this is little more than cosmetic, as the damage already done will take generations to take Greece back to where it was. It doesn’t blame the E.U. entirely, which is why the new government will target the graft that has been a feature of Greek society for decades and enforce taxation on its very rich and until now, political classes who have ‘ducked’ paying up so far.

Greece has little more to lose as a default on their debt is imminent. They can’t repay the debt even if they wanted to, which they don’t. The election has committed the new government to that position. The question stands, “Is the new Government and the pain it now has, sufficient to take Greece back to the Drachma?”

With a new government voted in to clean up this mess and to give it room to recover through either the writing off or re-scheduling and restructuring of its debt, it has the mandate to do what is necessary to achieve this. The two leaders have to be determined to achieve these results for if they aren’t they will commit political suicide and that of their party. This is what they are discussing this weekend.

We are reminded of 1919 when Germany itself felt the same when it had un-repayable reparation terms imposed on it at the end of the First World War and the impact it had on Germans then and for the next 25 years. Greece can’t follow that road, but if they feel strongly enough they can exit the euro and potentially the Eurozone!

On the other side, Germany and the strong northern members of the E.U. need a weak euro. The southern member states ensure that through their economic weakness they will continue to enjoy a weak and weakening euro. So they would not be happy to see Greece leave the euro or the Eurozone.

If Greece did leave it would ensure a major loss of international trade competitiveness, as the price of a strong euro would suck out the competitiveness of German and Northern member states goods, as their prices would jump with the euro. If that were to happen the euro would likely go much higher than its $1.40 peak of last year. No, the interests of the E.U. lie in keeping Greece and other southern member states economically weak, while retaining them in the Eurozone.

If we were able to measure the financial benefits to the strong member States of the E.U. we are in no doubt that the €250 billion in loans to Greece are only a small fraction of the profits gained because the euro has been much weaker than a Deutschemark would have been. Even at current levels the E.C.B. wants to see further falls in the euro exchange rate against global currencies, to stave off imminent deflation.

Spain, Italy and France are watching the events riveted to the potential outcome, which could spell the future of the Eurozone, either way. The hoped for integration of Eurozone member states always was a pipedream and a distraction from the real intent of the union of member states. As to the financial union under common rules of ehaviour the patterns of ehaviour differed so much before the formation of the E.U. that integration of such differing people was at best a vague hope, no more. Greece joined because of what it could get out of the Eurozone as did Germany and all other members. Austerity has not worked for Greece. It simply brought the country to today, close to leaving the Eurozone as a bad, bankrupt, debtor.

If Greece is successful in renegotiating its debt, or if it leaves the Eurozone and the euro, we believe that other economically weak member states will contemplate following it back to their old currencies. Then weighing the new price of German imports against, say, cheap Chinese alternatives could lead to a further decimation of exports from Northern Eurozone member states.

The history of Europe for the last 2,000 years shows that national integration, as is present in the U.S.A., is nigh on impossible. To think that that was ever a real intention was naïve. No, Greeks are Greeks, Germans are German. Never the twain shall meet. So financial realities now come to bear.

No protection from Creditors for nations!

In the case of individuals, institutions and municipalities in the developed world, when an angry creditor chases a bankrupt debtor, credit protection measures slow down the creditor. The days when a debtor would go to prison are long passed. But in the Eurozone, at sovereign level, no such protections exist.

The realities facing creditor and debtor, in the case of Greece and the E.U. are that they must slug it out pushing their own interests first. When the bruising hurts and threatened damage real, then a settlement will be reached, not before then. The Eurozone can carry the loss of the Greek debt if need be and could even enjoy a much weaker euro thereafter, but only if they accede to Greece’s terms to a large extent. Greece has now drawn a line in the sand that defines its stance and cannot afford to budge.

Writing off debt becomes the most pragmatic of options, but it seems that the Greek ministers have already ruled that out weakening their position right at the start of the negotiations by saying they did not want to write off that debt, just renegotiate it. As they sit at home this weekend they may well be contemplating a much more dramatic stance as they face the wall of resistance they saw in the E.C.B. and in Germany.

No E.C.B. loans against Greek debt from January 11

The ECB and Germany have already started the chest beating with fear and volatility hitting Greece’s financial sector, putting the government on the back foot.

The E.C.B. has stated it will not continue to give funding against Greek bonds from January 11thonwards. This threw pressure onto the Greek banking system who have put on a brave face so far. But with Greece’s back now against the wall it appears that this first hostile act is giving a mandate to the two Greek Ministers to take very strong action at a potentially greater cost to the country, but an even greater cost to the Eurozone!

With E.U. Q.E. beginning in March, it appears that Greece will lose out there too. If the E.C.B. follows through by not accepting Greek Bonds in this program too [it seems more than likely that this is the next pressure the E.C.B. will impose] it could lead to the Greek population accepting a departure from the Eurozone and the euro.

Will Greece suffer more if it writes off its debt to the E.U.? After all, the big attraction to Greece of being a member of the E.U. was the major loans and finance it was to receive. It has had these and it seems they are now being cut off, so what more is there in it for Greece? Perhaps a return to a weak Drachma will lead to a boost to the Greek economy and allow its politicians to blame the E.U. for its new woes. That way the new government would be heroes, no matter what the damage a failure to renegotiate its debt brings to Greece. To fail to achieve an acceptable renegotiated debt package would discredit the new government and the entire country’s credibility, irrevocably. It would be political suicide for the new government.

The way forward for them is clear. They have to be fully prepared to leave the Eurozone, unless the benefits of staying in it bring huge new benefits to Greece and its people.

But that message has not got across to the E.U. or Germany, yet. Our only question of the Prime and Finance Minister of Greece is, “Do they have the personal resolve to walk out of the Eurozone or not?”

Global consequences

A strong euro will hasten deflation in the Eurozone as well Draghi knows. The whole thrust of his quantitative easing policy is reliant on a weak euro. If a strong euro is seen, the entire globe will be affected. China sees the E.U. as its largest client, so a strong euro will see more Chinese goods flowing in or will deflation affect these no matter what their price is?

Deflation in the Eurozone will dampen that and affect the recovery in the U.S. The Fed is worried, as was seen in its statement of last week. The last time the FOMC statement made a direct reference to international turbulence was January 2013, when officials warned that “although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook.” Translated it means that Eurozone troubles are a danger to the U.S.’ recovery and could delay the raising of U.S. interest rates.

From now on, we expect growing currency volatility and a turning to gold and then silver, slowly but surely!